Winning a big customer is an exhilarating experience for every small business. It's just like hitting a treasure trove . . . this could provide your small business with the much-needed revenues and push your firm's reputation up significantly to persuade many new customers to join your customer base. Obviously, such a relationship carries weight, but sometimes the eagerness to 'win big' may lead to overlooking the potential damage from over-reliance of your business on one or a few big customers.
Customer concentration can be a very serious issue for a small business, because first, a small business, if it relies on a few big customers for revenues, can easily be brought to its knees when one or two of these customers suddenly pull an order. Every business is hurt when it loses a customer, but if you are a small business and a significant portion of your total sales is concentrated in the customer, the consequences could be catastrophic.
In addition, when you depend on a few big customers, your business strategy is most likely to be dictated by the needs and preferences of these customers, resulting in your failure to see the big picture of the market. Also, the big boys may try to force their whims on you when it come to payment terms, duration and prices. Neither is it wise to think that big companies are not exposed to risks. Market conditions can affect any business, both small and big.
To prevent your business falling into the trap of customer concentration, you need to understand your customer base thoroughly. Here I think ranking each of your customers by its margin contribution, growth potential and strategic fit could help a lot. Asking yourself how each of your customers is contributing to your business profitability (rather than revenue), how much growth potential each of them has, and how important you are to your clients: are you really needed by them or merely a 'nice to have' - all these things can give some valuable insights.
Besides considering individual clients, it is also important to think of concentration by industry. If majority of your revenues are coming from customers from the same industry, your small business would be susceptible to downturns in that sector. So, it is equally important, in addition to spreading your revenues across both vertical markets and geographical areas, to be alert to opportunities that exist in other industries.
I think every small business should take into account the risk of customer concentration in its business planning and operating process, and develop a contingency plan. Analysis of customer dependency should be done at a regular interval, and whenever the findings indicate to something like 10% of total revenues coming from one customer, or 25% from the top five customers, or 60% from customers from a single industry, this should be taken as warning bell.
Best wishes for a splendid New Year. Our weekly newsletter returns on January 2.
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